Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest interest rate decision from the Bank of England:
“No news from the Bank of England is good news for the UK’s mortgage holders. The Bank has now kept interest rates on hold for the second month in a row, and there is a growing body of evidence to suggest we have reached the peak of the interest rate cycle. Inflation is falling, the labour market is slackening, and the effects of previous rate rises are still working through the economy. It also appears the replacement of Jon Cunliffe with Sarah Breeden on the interest rate committee has shifted the balance in a dovish direction, with six members now voting to keep rates on hold, up from five in September.
“It looks like we’re now entering a new phase of suspended animation in the monetary cycle. The first phase was denial, as the Bank steadfastly maintained that inflation was transitory. This gave way to a sustained period of flurried action, as the Bank raised interest rates by 5% in less than two years. We’re now entering the third, agonising phase of the interest rate cycle: wait and see. Tighter monetary policy takes time to bed in, and the Bank doesn’t yet know if they have made the porridge too hot, or undercooked it. There may well be a fourth phase of correction, as the Bank seeks to fine tune its monetary position, and that could be up or down depending on the economic data that rolls in.
“The market is now pencilling in an interest rate cut next summer, and based on the latest projections from the Bank of England, that looks like a reasonable working assumption. But there is a lot of water to flow under the bridge between now and then, and the Bank does specifically highlight the possibility that rates may have to rise again. The case for sticking or twisting is still finely balanced and it would only take a nasty monthly inflation or labour market reading to start hares racing again, pushing up money market rates, and potentially mortgages too. However the reality is that future adjustments to monetary policy are going to be water off a duck’s back for consumers after the torrent of rate hikes we’ve seen in the last two years.
“This is of course the last interest rate decision before the Autumn Statement. When Jeremy Hunt stood up to deliver the Budget in March, the underlying economic forecasts predicted a peak in base rate of 4.25%. That flush is well and truly busted, and the Autumn Statement will doubtless see some pennies lost to higher borrowing costs. On the other side of the ledger, tax receipts have been strong this year, no doubt in part due to the combined pincer movement of frozen tax bands and inflation. That frees up around £20 billion compared to the March budget, a nice little buffer for the chancellor to contemplate.
“Rishi Sunak won’t be too happy with all the latest forecasts coming out of the Bank of England. While the Bank’s figures suggest he is on course to meet his pledge to halve inflation, the promise of a growing economy looks firmly wedged in the weeds. The central forecast is for the economy to flatline in the next twelve months, before eking out just 0.4% growth in the year after. That’s a bleak prediction for a government seeking to overturn a large gap in the polls, and both the PM and the chancellor will be hoping the OBR has a rosier view of the future when it compiles its all-important forecasts for the forthcoming Autumn Statement.”
